Longer-dated US Treasuries prices fell for a fifth straight day on Friday as investors worried about the impact of hefty amounts of new debt to fund the country's economic stimulus plans. The yield on the 30-year Treasury bond, which moves inversely to its price, had its biggest weekly jump since November 2001 due to concerns over pending supply, as well as US comments this week criticising the currency policies of China, the largest foreign holder of US Treasury debt.
But it was fears over the impact of US government debt issuance that primarily dragged 30-year bond prices down and yields up to the highest since early December. "I would attribute the long bond selloff today and since the end of last year to massive impending US Treasury supply that comes as a result of the large fiscal stimulus that is already under way and programs to stem the financial crisis," said Ross Junge, senior vice president of portfolio management at Aviva Investors North America in Des Moines, Iowa.
Another factor weighing on the long bond, he said was "the perceived risk that China might stop buying long-term Treasuries." Expectations are that the government will issue about $2 trillion of debt this year alone to pay for various rescue plans for the financial sector and the economy in general. At the same time, with corporate bond yields having reached extremely high levels late last year, investors have started to venture tentatively out of the comparative safe haven of US government securities into higher-yielding corporate debt.
"The government will be issuing a tremendous amount of debt. You are also having a flight into high-quality corporate bonds," which is drawing some flows away from government debt, said Roy Williams, CEO of Prestige Wealth Management Group in Pennington, New Jersey.
The 30-year Treasury bond traded 1-5/32 lower in price for a yield of 3.32 percent, compared with 3.26 percent late on Thursday. Benchmark 10-year Treasury notes traded down 3/32 in price for a yield of 2.61 percent, from 2.60 percent late on Thursday.
"The Fed is trying to hold rates down to encourage lending," said Junge. In December, Fed Chairman Ben Bernanke said the US central bank might start buying longer maturity Treasuries. "We would not be surprised over the next couple of days to see Fed officials starting to talk longer-term Treasuries downwards, given the levels we have reached here and if that doesn't work I think they are going to buy longer-term Treasuries," Junge said.
The 10-year Treasury note yield has jumped nearly 60 basis points since hitting a five-decade low of 2.04 percent in mid-December. Since US fixed mortgage rates are referenced to the 10-year yield, mortgage costs are starting to be rise. More expensive mortgages could deal another blow to an already fractured US housing market, the root of the economic weakness.
Bonds were also being hit by fears that China might slow its purchases of Treasuries, or even sell some of its holdings, after Treasury Secretary-designate Timothy Geithner said this week that President Barack Obama believes China was manipulating its currency.
Two-year Treasury notes traded 5/32 lower in price for a yield of 0.83 percent, from 0.74 percent late on Thursday. The more aggressive move down in longer-dated prices this week has sharply steepened the Treasury yield curve, with the spread on the yield between two- and 10-year notes widening to about 180 basis points from 161 basis points a week ago.